Because Mainstream Personal Finance Advice Is Not What It Should Be

This past weekend the Wall Street Journal managed to concoct a little excitement around something only a nerd like me could find exciting, the rolling over of 401k accounts. The article, variously titled “The Grudge Match Over Your 401(k): Employers and financial firms vie for control of your savings.” or “The 401(k) Wars: Fighting for Investors Cash” uses photos of an NFL player for illustration. (He is quoted at the end.)

The gist of the piece is that after years of acting with relative indifference to ex-employees taking money out of their 401k plans, companies are suddenly trying to discourage this behavior.

A company might want you to keep your assets in the 401k it sponsors because it wanted its plan to be a large as possible, which might lower average costs. This is a fairly modest incentive, however, as evidenced by how long it has taken for most companies to get around to doing anything about it. And for some employers, the cost of keeping an ex-employee in the system might actually be greater than the savings from having a bigger plan.

So why do they care? I’m not convinced that as a general rule they do. More likely it is the asset management companies who actually run the plans and stand to lose fee income if the ex-employee leaves that are driving the retention effort. How much effort is that? The WSJ article cites what is probably an extreme case.

The state of North Carolina recognized the importance of keeping people in its $4.5 billion defined-contribution plan a couple of years ago, as financial markets started to sink. Now, it offers preretirement counseling sessions where workers are encouraged to stay in the plan. Employees who contact the plan’s call center to ask for a lump-sum distribution are led through a discussion of other options before they’re sent a check. Though departing workers in the past were handed retirement-plan withdrawal forms, "we’re really trying to train folks so that’s not the first form that goes in front of a departing employee," says state treasurer Janet Cowell.

What exactly NC thinks is important about keeping people in the plan is not explained. However, I am pretty certain that the helpful professionals giving the counseling sessions and answering the phones at the plan’s call center do not work for the state, but rather Prudential Investments, which runs the scheme and will profit if the ex-employee leaves money in the plan. (More details here.) This is legal, but probably shouldn’t be.

If you leave a job, what you generally want to do is roll over your 401k into an IRA. And in this case, when I say “generally” I mean very nearly always. An IRA is basically the same as a 401k except that you can choose any investment you like rather than the short list available in a 401k, the fees are transparent, and the customer service is often much better.

Finding reasons why a person might want to stay in a 401k is not easy and quickly degenerates into a personal finance trivia game. The 401k might have access to special investment options not available IRAs belonging to the general public. There are some differences between IRAs and 401k with regard to estate planning and bankruptcy in some states. And 401ks are better if you plan to retire in your late 50s.

But even when added together these reasons can only apply to a tiny slice of the ex-employee population. If it is as much as 1% I would be surprised. For just about everybody there is nothing to discuss. Roll your 401k into an IRA as soon as you can navigate your way through all the helpful folks trying to talk you out of it.

Alas, you would not know this reading the WSJ article, which treats the rollover question as a conundrum of great complexity. It even provides a help-you-decide color graphic with columns listing pros and cons with regard to various factors. (Unhelpfully, it conflates rolling over with converting to a Roth, implying that if you didn’t want to go with a Roth that would be a reason to stick with the 401k.)

I tend to favor “it depends” as an answer to personal finance questions that many pundits answer with an unequivocal yes or no. But, much as I sympathize with the WSJ’s need to inject some drama, in cases like this, where the answer is a no-brainer for just about everybody, treating the issue as one of complex ambiguity is not helpful.

One of the supposed advantages of a 401(k) is that employer stock gets a special treatment. However, holding so much employer stock seems worse than whatever special treatment you might get for it – if anything, an argument for getting out of that old 401(k).

Some large employers do, in fact, have “admiral” or other cheap shares. I wonder what percentage of people have worked at at least one large employer? Seems like that alone would be more than 1%.

401K allows loans, IRAs do not, unless I’ve completely missed something. In some circumstances the access to cash from one’s retirement accounts (and a guaranteed rate of return to oneself) is a valuable option.

“…implying that if you didn’t want to go with a Roth that would be a reason to stick with the 401k…”

The opposite is true, in many cases: money should be left in a 401k if one plans to do a Roth conversion, so that that money doesn’t get caught up in the pro rate rule. The 401k can then be rolled over to a IRA AFTER the Roth conversion.

Trivia? Yes. But since darn near every single personal finance outlet has been talking Roth conversions, I’d think more folks would know this one.

I agree that rolling over to a IRA is a good choice. My comment is that “as soon as you can” should be taken with the caveat that some funds have short term trading fees and it is possibly beneficial to check on this and wait the 90 days after the last contribution to avoid this fee.

Indeed. It’s so beneficial that one wonders what good reason there is to (usually) make a worker wait until he quits or gets fired to rollover into an IRA. I have no intention of leaving my job, but I would love to get my money out of their mediocre 401(k).

My 401k has institutional shares of Vanguard funds. I’m probably in the 1% that really has to think about whether roll over. Most retirement plans I’ve seen (visit the Bogleheads forum for a sample) scream “run away.”

I had a Vanguard Simple IRA that took $25 per year from me. This was an annual fee, and it exceeded 1% of the assets I had in the fund.

Plus, when I started contributing, they took the fee every November. After a year, they changed to taking the fee every June. The account was open exactly two years and they took three “annual” fees of $25 each. I spoke to them, and they would not refund it.

I left my job, and you can’t contribute to a Simple IRA as an individual. So if I hadn’t switched to a discount broker, I would have been really ripped by Vanguard.

Disclaimer

All advice in this blog is guaranteed to be worth at least what you paid for it, or double your money back. All persons dealing with matters of personal finance are advised to gather information from blogs, books, radio and TV, consult with professionals, discuss the matter with anybody who will listen, and then make their own decision. Because it’s their money.